How Stessful is a Stress Test?

Here is an interesting link on the "stress tests" being conducted by the government. I prefer to call them the "non-stress tests" but let's assume they are what they are represented to be. One of the key measures supposedly being tested is tangible capital equity ("TCE"). What the heck is that, you might ask. I initially asked the same question as I do environmental law and in that world TCE is a degreasing chemical that is polluting a good bit of this country's groundwater. Nonetheless, this TCE is something different.

TCE in a financial sense is a measure that looks at how much common equity is supporting a company, which ignores things like goodwill, which these days may not be worth much. In other words, it has more meaning in economically depressed times than some other measures. The problem is, there is no clearly defined way to define TCE, the government definition may be too lax, and the each company gets to do their own definition and calculation. The following link has a very nice chart on how some companies are perhaps overstating their TCE. Guess which head the list? The usual suspects. Wells Fargo leads the crowd by overestimating TCE 146% - according to the linked article. I am not sure the criteria used to build the chart in the attached but I trust the source.
And as the article notes, for all companies some off balance sheet assets are not included.

The biggest playground for me in the linked chart is the last category for level 2 & 3 assets as a percentage of TCE. To be clear, level 2 is "mark to model" over which there is a good bit of discretion by the bank and level 3, which is pretty much mark it to whatever in the hell you can justify. So, for example, Wells Fargo, in addition to the overstatement noted above, has level 2&3 assets that are a multiple of 24 times their TCE. This, of course, pales in comparison to Citigroup at 66 times or Bank of America at 38 times. Do we have something to hide? Me thinks so. Will the stress tests cause these banks to raise their kimonos and reveal the truth, I think not. We will see what the stress test results reveal. I suspect nothing of value.

http://www.nakedcapitalism.com/2009/04/guest-post-handicapping-stress-test-tce.html

Now Number 29

Bank failures 26, 27, 28 and 29 are here for the year (and another credit union down too). Frankly, the number should be higher and should include some more significant banks - but for the alphabet soup of government programs designed to avoid a major bank failure - apparently at any cost. Still, four banks down this week is a up-tick.

http://www.calculatedriskblog.com/2009/04/bank-failure-29-first-bank-of-idaho-fsb.html

Disclosures: None.